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Wal-Mart’s Expansion to China

Wal-Mart’s Expansion to China Essay Sample

Abstract

Current paper will give a brief description of Wal-Mart Company mainly focusing on its mission and operations. The paper will then explain why China is the best strategic market for the expansion of Wal-Mart and the benefits for Wal-Mart and China, should it invest using Foreign Direct Investment. Institutional constraints that Wal-Mart might face and ways of addressing them are discussed in details. A brief VRIO (Value, Rarity, Imitability and Organization) analysis of Wal-Mart is done, with reference to its entry into China’s market. Finally, there is a brief discussion of cultural and political aspects of the international business world and why Foreign Direct Investment is the best option for Wal-Mart’s entry into China.

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Wal-Mart’s Expansion to China

The first Wal-Mart store was opened by Mr. Walton in 1962 and since then the store has experienced an exceptional growth. Wal-Mart’s mission, “saving peoples money so they can live better,” is based on the concept that consumers want quality products at affordable prices (Rugman & Verbeke, 2004). Wal-Mart is famous for its friendliness to consumers of average income. Wal-Mart stores are highly competitive in the economic times and the industry where consumers are looking for lower prices (Rugman & Verbeke, 2004). The competitive strategy for Wal-Mart is, therefore, cheaper prices as compared to their competitors. Wal-Mart’s competitiveness creates an effect where suppliers fight for business with Wal-Mart and, therefore, Wal-Mart gains bargaining power over the suppliers they can buy their products from. Wal-Mart discount stores carry a section of groceries and general merchandise. Most of them have garden centers, optical centers, bank branch, fast food outlets and pharmacies (Rugman & Verbeke, 2004). Current paper studies the reasons why China is a strategic market for expansion of Wal-Mart and the reasons why Foreign Direct Investment is the best option for Wal-Mart. The paper will also give a detailed Value, Rarity, Imitability and Organization (VRIO) analysis of Wal-Mart Company in relation to its entry into China. Finally, a detailed description of institutional constraints, cultural and political aspects of the international business world will be provided.

China is a strategic target market for the expansion of Wal-Mart through Foreign Direct Investment. China is not only an option for Wal-Mart’s business expansion but a strategic necessity for its business future. There is a rapid growth of the economy of China promising a huge market in the future, and with Wal-Mart facing a slow growth in the USA, it is wise for Wal-Mart to take the attractive and available options in China (Peng, 2013). According to Peng (2013), Wal-Mart stores have been struggling with poor sales growth with over four hundred billion annual sales, while it still has to be involved in massive sales promotions and discounts with the purpose of maintaining two percent growth rate in sales annually. Peng (2013), states that the enormous emerging middle class in China could help in solving Wal-Mart’s sales growth problem. Kumar and Chase (2006) add that by 2015 China will be the third largest global consumer market after the United States of America and Japan. Although there have been opened numerous stores in China since 1996, based on the above facts, it is wise for Wal-Mart to capture a larger market share in the country.

Key Institutional Constraints

Shortage of labor and management in China is the first institutional constraint that Wal-Mart must consider. According to Kumar and Chase (2006), the employment system of China is struggling to produce the management talent required by employers. Lu (2010) adds that Chinese enterprises are slow in developing enterprise leaders, according to State Council Development Research Center of China. Shortages of labor forces are not only confined to managerial personnel but non-managerial professions, as well. Most of the labor forces in China are located in the rural areas and for Wal-Mart to tackle such constraint it has to focus more on the small and emerging rural cities.

Government influence is the second constraint. China is a communist country, and state-owned enterprises contribute almost one third of the total GNP. Therefore, the government influences the corporate strategy more directly than many other countries (Lu, 2010). Such constraint will support the expansion of Wal-Mart in China if it studies the policies and regulations and determine what may favor its entry. Furthermore, Wal-Mart will be favored by such constraint if it works in collaboration with the government, enhancing good relations and being conversant with the local market conditions.

Finally, Wal-Mart managers based in China might face a very competitive global industrial environment. Recruiting managers who can help Wal-Mart face the challenge of global competition might present a major constraint. The entry of Wal-Mart into China might be favored by the constraint because it is investing in China mostly facing domestic competition from Chinese firms that may not have Wal-Mart’s international standards. Wal-Mart will also be favored by the constraint if it trains its management teams to have the ability to meet and surpass international standards (Chari & Madhav Raghavan, 2012).

Value, Rarity, Imitability and Organization (VRIO) Analysis

According to Bose (2012), the question of value revolves around whether a firm can neutralize an external threat or exploit an opportunity with its capability and resources. Like many other companies, human capital is a major resource of Wal-Mart, alongside with its image, the quality of products, employee satisfaction and its stores’ layout. The brands and products of Wal-Mart are valuable resources, as well (Bose, 2012). The question of value, therefore, is whether the capabilities and resources of Wal-Mart enable it to exploit external opportunities, in this case, expanding to China. Concerning Wal-Mart and China’s market, employees are an important factor for Wal-Mart to consider. The employees affect the moods of the consumers, therefore, it is important for them to be energetic, courteous, knowledgeable and helpful. Wal-Mart is known for bad relationships with its employees. In some instances, Wal-Mart has been known to pay its employees wages that are below general market wages (Chari & Madhav Raghavan, 2012). It can cause a disconnection between the employees and the management and lead to lack of a competitive advantage in human capital for Wal-Mart as it ventures into Chinas’ market. Lack of employee satisfaction might, therefore, reduce the capability of Wal-Mart to exploit the China’s market and should be revised. Brands and products of Wal-Mart are valuable to the company and consumers because they are of high quality and are affordable. Therefore, it will offer a competitive advantage as it ventures into China’s market (Chari & Madhav Raghavan, 2012).

According to Lu (2010), the question of rarity involves whether the control of capability or resources is in the hands of the relative few individuals of entities. The differentiation between the prices offered by Wal-Mart and its competitors is the main source of its competitive advantage. Therefore, while the rarity of its products and resources may not be termed as being its main source of competitive advantage, the price differentiation is (Lu, 2010). Based on Wal-Mart’s image, “saving people money so they can live better,” the main goal is to improve the lives of average people by giving the chance of getting quality products at lower prices (Lu, 2010). Wal-Mart’s image is, therefore, unique and will offer a competitive advantage and support the entry of Wal-Mart in the China’s market. In case of the rarity of Wal-Mart’s geographical locations, it has worked for the benefit of Wal-Mart in the past. It occurs due to the scarcity of the larger stores in the rural markets where Wal-Mart stores are located. It might work to the advantage of Wal-Mart expansion in China because the emergence of huge middle class, who want to save money and improve their lives, will shop at Wal-Mart (Peng, 2013).

According to Lu (2010), imitability involves the question of whether it is difficult for a firm to imitate and if a firm trying to duplicate its resource or capability will encounter a cost disadvantage. In case of Wal-Mart’s expansion to China, there is no major significance between the practice of Wal-Mart and its competitors regarding human capital, therefore, it does not have a superior advantage. There is, however, an advantage in price differentiation, which may be advantageous but there are no specialized product lines that are dissimilar to its competitors. Coinciding with the imitability of Wal-Mart’s image of low prices to improve the lives of people, there is the imitability of its stores geographical locations. Wal-Mart is mainly based in rural areas and it might be advantageous in its venture into China’s market by having a dominion in separate markets from its competitors (Lu, 2010).

According to Chari & Madhav Raghavan (2012), the question of organization is bases on a fact how well a firm is organized and ready to exploit resources or capability. Wal-Mart is an equal opportunity employer and high education of its lower level employees is not a crucial factor. It can work to the advantage of Wal-Mart as it ventures into China’s market. An issue may, however, arise due to the earnings of Wal-Mart employees who, according to Chari & Madhav Raghavan (2012), can earn twenty percent less than an average retail worker. Lower level employees are mostly in contact with the customers more than the managers and, therefore, Wal-Mart should improve earnings of its employees to increase its competitive advantage in China’s market.

Cultural and Political Aspects of the International Business World

In the global expansion of businesses, cultural and political aspects are important to consider. Some of the political aspects that need consideration are the institutional environment, taxation, property rights, recourse and expropriation threats and movement of equity (Rugman & Verbeke, 2004). The issues related to institutional environment is based on the social, legal and political ground rules, in which the foreign investor has to operate. In this case, Wal-Mart must take into consideration China’s social, legal and political rules in order to form good business relations with local businesses and the government. Secondly, the issue related to property rights deals with trademarks and patents. Thirdly, issues of taxation involve the kinds of taxation schemes that Wal-Mart will face in China. Finally, recourse deals with the possibility of action due to the possibility of the image damaging, which makes arbitration necessary and the length of the action (Rugman & Verbeke, 2004).

To address the associated political and cultural issues, Wal-Mart should first learn the ideologies of China which mostly lean towards communism. Wal-Mart should understand the stability of the country by researching on the changes in regime, cultural divisions and sources of violence that may lead to an uncertain business environment. Finally, Wal-Mart will work with local business partners and offer third party services such as wholesale, third party logistics and supply chain management solutions (Rugman & Verbeke, 2004).

Foreign Direct Investment (FDI)

Foreign direct investment is the best strategy for Wal-Mart in its expansion in China’s market. According to Peng (2013), FDI is an investment done by a foreign corporation in any country that reflects a resident entity objective to obtain a lasting interest and control. The option of foreign direct investment will be beneficial to both Wal-Mart and China. Foreign direct investment will contribute to Gross Fixed Capital Formation, Gross Domestic Product and balance of payments in China. It will also facilitate the transfer of technology, skills and managerial practices necessary for accessing international markets. To Wal-Mart, using foreign direct investment to expand to China will enhance its domestic competitiveness. Thus, it will give Wal-Mart opportunities of taking significant advantage of international trade, maintain competitiveness of costs in the domestic market and reduce its dependency on existing markets (Peng, 2013).

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Challenges of Foreign Direct Investment

The choosing FDI option may be problematic for Wal-Mart as it expands to China. One of the challenges is the complicated licensing process. Foreign retailers in China have to undergo a stricter and more complicated licensing process than their domestic competitors (Peng, 2013). The licensing process can be slow, inconsistent and costly. If such challenge arises, Wal-Mart should first try to understand the necessary policies and regulations to overcome the complicated business licensing processes. Wal-Mart will, therefore, be required to be patient because in the end they will understand the policies that lower their market entry thresholds, boost domestic consumption and encourage certain business formats (Rugman & Verbeke, 2004). Secondly, the Chinese people per capita income is low and it may be problematic for Wal-Mart. Although Wal-Mart may receive cheap supplies, it may not be of high quality as compared to those of the US. To solve this problem, it will be wise for Wal-Mart to work with local business partners who are able to contribute valuable resources, including government relations, business networks and knowledge on local market conditions. Thirdly, cultural differences can be an issue because the Chinese may have certain negative perceptions about the USA companies. Wal-Mart managers will, therefore, need to learn the values of the Chinese and be watchful in the way they manage their customers and employees (Bose, 2012).

In conclusion, China has always been an attractive market for foreign investors. In order for Wal-Mart to continue with its business expansion in China it should depend on its popularity as it is a well-known global company with a good reputation. Foreign Direct Investment is the best option for Wal-Mart because it will increase its competitive advantage.

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